2/23/2011 @ 6:00PM

Larry's Long Reach

Oracle cofounder and Chief Executive Larry Ellison has long desired to undo Microsoft and become, as he has put it, the “number one” software company in the world. He’s not there yet, despite having spent some $40 billion to buy up 75 hardware and software companies over the years. Microsoft claims a market capitalization of $226 billion compared with Oracle’s $169 billion.

Yet recently one of his lesser-known investments is starting to take nips out of Microsoft, SAP and, oddly enough, even his own Oracle.

The story goes back to the late 1990s, when Ellison cofounded and later poured roughly $100 million of his own money into NetSuite, a Silicon Valley company that sells complex accounting and financial software via the Web. Tech buyers, wary of pushing their most precious data online, didn’t bite, and so for a decade NetSuite was stuck selling its software to tiny firms. Software insiders snickered that it was the lesser of Larry’s offspring (the larger ones including Siebel Systems, which he later bought for $3.6 billion, and Salesforce.com). NetSuite went public in December 2007; the stock soon after cratered.

But Ellison’s instincts turned out to be right. Companies have become more comfortable moving their data to the Web (or “cloud,” in industry parlance), if it means they save on the cost of running the machines necessary to manage that data in-house. Salesforce has successfully pushed this approach in customer and sales-tracking software, thanks to its bombastic pitchman Marc Benioff, an Oracle alum and Ellison protégé. Ellison also has a small stake in Salesforce.

NetSuite has found itself fashionable. Last year its revenues totaled $193 million, up 16% with operating losses of $25.6 million. Its stock has jumped 248% in the last two years (see table, “Too Fast, Too Furious”). Ellison’s 50.5% stake, worth $930 million, is no longer a mere rounding error in his $27 billion net worth.

And maybe just as important, for him, NetSuite is grabbing Microsoft’s customers. “It has been dramatic,” says NetSuite’s mild-mannered chief executive and Oracle alum, Zach Nelson. At the company’s annual gathering of customer prospects last fall nearly all 30 were aiming to replace Microsoft’s business management software, called Microsoft Dynamics. The year prior just a handful were would-be converts. NetSuite recently replaced Microsoft at Wasserman Media Group, an athlete agency and consulting shop, and ClearChoice, a $120 million dental practice management firm. Microsoft has yet to launch an online version of its basic business software and would not comment.

NetSuite is also making inroads at SAP, Ellison’s smaller software rival. Recent customer wins include Schaefer Oil and molding firm Commco. “We call this the sandwich effect,’” says NetSuite’s Nelson. By that he means SAP faces competition either from Oracle for its large accounts or from NetSuite in smaller ones. SAP disagrees and points to 250 customer wins in the past eight months for its new Web software.

Then there’s this wrinkle: NetSuite sometimes finds itself competing against Oracle, in a sort of Larry vs. Larry face-off. This past August it landed a deal with Knowledge Universe. The educational training firm uses Oracle software for its accounting systems in the U.S. but wanted less pricey Web software for its overseas expansion. (Ellison bankrolled Knowledge Universe in 1996, along with fellow billionaire Michael Milken.)

Nelson says this kind of overlap is rare, and that if both companies are in the same room “one of us doesn’t belong.” Yet he is ramping up his sales organization in the next few months to close bigger, cross-border deals–”the kind that Oracle and SAP go after.” He adds: “Customers get cost savings with us compared to the legacy guys but also the ability to see what the heck is going on in far-flung divisions. The information isn’t stuck on a machine over there, it’s accessible instantly.”

Ellison has attempted to avoid any conflict of interest by putting his NetSuite stake in a lockbox run by a former accountant who votes in proportion to the public shareholders and can only sell to cover taxes. An exception: He gets to vote directly on any proposal involving change of ownership. Ellison wouldn’t comment.

Nelson used to chat with the billionaire monthly, but nowadays they meet once a year, for lunch at his home in Woodside, Calif. Over the years Ellison pushed Nelson to spend on new hires in the wake of the tech bubble and to specialize NetSuite’s software by industries. Nelson’s belief in NetSuite’s Web approach flies contrary to what Oracle has done in cobbling together software from PeopleSoft, Siebel and others.